A note from Barclays says, "A hawkish cut by the MPC is an opportunity for the pound," ahead of the Bank of England's eagerly anticipated August 01 policy decision.

Economists at Barclays expect the Bank of England to pull the trigger on the cutting cycle this Thursday, based on "the revealed preference in June by the core of the MPC to start easing soon."

The rule of thumb is that a rate cut can weigh on the Pound. Indeed, we have seen the UK currency come under pressure over the past five days as market expectations for a cut have gradually inched higher to stand close to 60% at the time of writing.

In theory, a cut would require the difference (approx. 40%) to be priced into the Pound, which would mechanically trigger further downside.

"One risk that could also slow the pace of further GBP appreciation is BoE policy," says Joshua Wilcock, FX Strategist at BNP Paribas. "An August move could precipitate some near-term GBP weakness as rate differentials could narrow given that the market has not fully priced in a 25bp cut at the time of writing."

But the extent of this downside, and whether the currency can ultimately rebound, will depend on the accompanying communication.

A plurality of economists expect an August 01 start date, particularly given the odds of a September cut at the Federal Reserve are now close to 100%, offering the much-desired cover Governor Bailey and his team would prefer.

Based on previous voting patterns and subsequent speeches we know two members of the MPC are very unlikely to vote for a cut as soon as August. On the other hand, we have two that are almost certainly to repeat their previous votes for a cut.

This leaves a rump of centrists, including the Governor, his deputy, and the Chief Economist, who will sway the outcome.

Unfortunately, we have heard nothing from these individuals for some time now owing to the pre-election purdah period that forces civil servants into a communications blackout. Analaysts at Oxford Economics say this alone is enough to ensure the Bank delays a cut until September.

But, a delayed cut could still result in a softer Pound if it is accompanied by clear guidance that a September rate cut is coming, meaning Pound Sterling could find itself in a lose-lose situation where it falls regardless of the decision.

What ultimately matters is the guidance and how it gels with the forecasts: what do we learn about the prospect for cuts beyond September? After all, the question markets are interested in is the quantum of rate cuts that are to come, not necessarily the start date.

A shallow rate cut profile would likely support the Pound, but a deep profile would result in selling pressures.

"We now expect the MPC to start cutting rates in September, but we continue to expect a total of 75bp of cuts this year, and a huge 175bp of cuts next year. This is a faster and deeper rate cutting cycle than financial markets expect," says Daniel Vernazza, Chief International Economist at UniCredit.

Any commitment to a steady pace of cuts could spell the end of the Pound's 2024 outperformance.

"We think that the outlook for sterling remains bearish, especially moving into 2025," says UniCredit's Mialich. "Given the intense easing we expect from the BoE. This will likely drag GBP-USD down towards 1.20 and push EUR-GBP back above 0.90 by the end of 2025."

If the Bank is non-commital about further rate cuts beyond September, the Pound could soon recover post-decision losses and rise through the summer. Some analysts say this is a likely path to take and would mirror that of a highly data-dependent strategy at the European Central Bank.

"A hawkish cut by the MPC is an opportunity for the pound," says a note from Barclays.

"Rate differentials should not be much affected by the reallocation of cuts across the cycle, implying limited damage for the pound. Instead, demand resilience and a willingness to re-engage with the EU are far bigger positive influences for the pound, in our view, and we look to re-engage on the long side on any further weakness," adds Barclays.

Currency strategists at BNP Paribas say as long as the BoE pursues policy easing in a cautious manner, we would not view this as a reason to stop expecting GBP outperformance over the medium term.

The French bank forecasts the Pound to Euro exchange rate at 1.2050 by year-end and the Pound to Dollar rate at 1.28.

After a series of mixed European GDP and inflation numbers, some US data hit the market yesterday in late afternoon trading too. June JOLTS job openings were at a higher-than-expected 8.18m, down from an upwardly revised 8.23m. Consumer confidence in the Conference Board indicator picked up from 97.8 to 100.3 in July with an improvement in the expectations component offsetting a drop in the assessment of the present situation to the lowest since mid-2021. After some intraday volatility, yields nevertheless ended the day lower. Geopolitical concerns took the upper hand in late US dealings amid reports of Israel having conducted a Hezbollah-aimed retaliatory strike near Lebanon's capital Beirut. Net daily changes in US yields varied between -2.9 and -4.2 bps. German yields followed by -0.7 and -4.2 bps. Tech sold off again in equity markets, lowering the Nasdaq by some 1.3%. The dollar didn't take up its safe haven role (e.g. EUR/USD only marginally lower at 1.0815) but the yen did. USD/JPY's close at 152.77 was the lowest since mid-April. JPY extended gains this morning going into an important BoJ meeting before paring them again (see below). Other market moves take place in Aussie markets (cfr. infra). Asian equity markets shrug off geopolitics by rising up to 3% in China. Both US yields and the dollar trade little changed ahead of some key data, including the ADP job report (expected job growth of 150k) and the Employment Cost Index (+1% in Q2), and the FOMC policy meeting later today. The Fed's status quo at 5.25-5.5% is widely anticipated. The central question is whether the recent string of beneficial CPI outcomes and mostly below-consensus economic outcomes will prompt clearer clues towards a first cut (in September) in either the statement or the presser. We think there's a possibility of that to happen, be it subtle in order to prevent the recent sharp yield correction go much further against the background of thinner liquidity circumstances and the risk of a technical acceleration should first support zones in the likes of the US 10-yr break. Complementing the case for (short-term) yields not to drop much lower from current levels is the current pricing in money markets (almost three cuts priced in for 2024). The four cuts for 2025, as things currently stand, seem appropriate as well. First support for the dollar kicks in at EUR/USD 1.09. That should hold.

The Australian dollar and swap yields are under pressure this morning. AUD/USD is testing the 0.65 support zone, down from a 0.654 open. Australian swap yields tumble between 11.9 and 19 bps across the curve, the front outperforming. These sharp moves follow the release of Q2 CPI figures. They were bang in line on a headline level, 1% q/q and 3.8% y/y with the latter even quickening from the 3.6% in Q1. Core gauges, though, decelerated more than expected. Advancing 0.8% on a quarterly basis, the yearly prints eased from 4% to 3.9% and 4.4% to 4.1%, depending on the gauge. While still above the Reserve Bank of Australia's 2-3% target range, the sizeable market moves comes amid speculation the central bank was closer to tightening policy further short term on stubborn inflation rather than easing. It was the RBA itself that as recently as June flagged the possibility of doing so. Today's data wipe out all such market bets for the upcoming meetings. A rate cut isn't expected at next week's though with a full 25 bps move priced in for February 2025 currently.

The Bank of Japan surprised some in the market by raising the policy rate from a range of 0-0.1% to “around” 0.25%. The decision follows as economic activity and prices have been developing generally in line with the BoJ's outlook, adding that moves to raise wages have been spreading across regions, industries and firm sizes. The hike came against the background of new forecasts, which entailed a minor growth downgrade for the current FY (0.6%) while leaving forecasts for the next two years unchanged at 1%. Core inflation (ex fresh food) was seen lower this FY at 2.5% (from 2.8%) but was tilted to 2.1% for the FY to March 2026 (unchanged at 1.9% for the FY thereafter). The BoJ said that if this outlook materializes, it will further raise the (still accommodative) policy rate. The central bank also announced to taper its monthly bond buying purchases by JPY 400 bn (from JPY 6000 bn now) each calendar quarter with an interim assessment scheduled April 2026. By then, the bank's balance sheet is seen to have shrunk by about 7-8%. That's slightly softer than markets expected, which was the buying pace cut in half in tops 1.5 years time. The yen whipsawed on the BoJ outcome before trading back to opening levels of USD/JPY 152.8. Japanese yields to jump an unusually big 2-7 bps across the curve, the front underperforming.

The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed's higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. Disappointing US and unconvincing EMU data, however, for now brings yields back to their post-French snap election low. The 2.34%-2.4% support zone is being revisited but looks solid.

The Fed indicated that it needs more evidence to lower its policy rate. June dots suggested one move in 2024 and four next year. Disappointing ISM and back-to-back downward CPI surprises put the US money market back on more than two rate cuts this year (September/December). The US 10-yr yield tests the recent lows and the downside of the downward trend channel in the 4.2% area.

EUR/USD tested the topside of the 1.06-1.09 range as the dollar lost interest rate support at stealth pace. Markets consider a September rate cut a done deal and only need confirmation from high-ranked Fed officials. In the meantime, the euro got rid of the (French) political risk premium. EUR/USD recently evolved back to a more neutral positioning but is holding up rather well despite ongoing poor EMU data.

Debate at the BoE is focused at the timing of rate cuts. May & June headline inflation returned to 2%, but core measures do not align a sustainable return to target soon. Some BoE members at the June meeting nevertheless appeared moving closer to a rate cut. Labour revealed a near £22bn of unfunded commitments, setting the stage for a painful Budget release on October 30. EUR/GBP 0.84 support is being tested.

Much of the debate surrounding the implications of a possible second U.S. presidential term for Republican Donald Trump has focused on what may happen to the U.S. and global economies.

Trump's plan to impose tariffs of 10% on virtually all imports into the United States, and as much as 50% on those from top trading partner China, have raised the spectre of higher inflation and interest rates, and a less competitive market.

But for commodities, the bigger risk of a Trump return to the White House is the response the rest of the world is likely to have to the imposition of U.S. trade tariffs.

Political leaders across the globe will be unable to sit idly by if Trump places barriers on their exports to the United States.

Any unilateral action by Trump is thus likely to be met by retaliation from U.S. trading partners, even if they are erstwhile political allies, such as countries in Europe and some in Asia, such as Japan, South Korea and even India.

If it's inevitable that U.S. trading partners respond to Trump's proposed actions by putting tariffs on imports from the United States, the main question is then what form will they take?

While major U.S. exporting companies such as airplane maker Boeing will have cause for concern, a far easier target for retaliation is likely to be U.S. commodity exports.

The United States is the world's biggest exporter of liquefied natural gas (LNG), and ranks fourth globally for exports of crude oil and all grades of coal.

A major buyer of U.S. commodities is China. If Trump were to impose tariffs of 50% on its exports, Beijing could effectively ban all commodity imports from the United States, either formally or informally.

U.S. exports of crude oil to China were 10 million barrels in July, according to commodity analysts Kpler, and that figure is expected to rise to 16.58 million barrels in August, which would be the most since April 2023.

For the first eight months of this year U.S. crude exports to China are tracking at about 309,000 barrels per day (bpd), which represents only about 3% of China's total imports, but accounts for about 7.5% of total U.S. shipments.

In other words, it would likely be fairly easy for China to stop buying U.S. crude and find alternative suppliers, such as Angola and Brazil.

But how easy would it be for U.S. oil producers to replace the loss of Chinese buyers?

Much will depend on whether other countries place tariffs on U.S. commodity exports.

Imagine if the European Union, Japan and South Korea all put a 10% tariff on U.S. crude in retaliation for Trump putting a similar impost on their exports to the United States.

The European Union, Japan and South Korea typically account for about 60% of U.S. crude exports.

By putting tariffs on U.S. crude, LNG and coal, the rest of the world could keep U.S. energy exports in the market, but force U.S. companies to either offer discounts to keep their prices competitive or lower output.

U.S. LNG exporters may be more vulnerable than crude producers, given they have no alternative markets other than exports.

For China, replacing U.S. LNG would be more challenging than replacing U.S. crude, but still likely doable, given the fairly small proportion of U.S. LNG in its total imports.

In July, China's imports of U.S. LNG were 670,000 metric tons, or about 10.5% of the monthly total of 6.39 million.

For the United States, exports to China represent only about 8% of its total LNG shipments. But if Japan and South Korea are added in as well, then exports to the three main Asian buyers rise to about a quarter of the total, based on U.S. shipments in June of this year.

If tariffs were placed on U.S. LNG by the North Asian importers, it would put pressure on U.S. companies to lower prices to compensate.

U.S. coal exports have averaged about 7.5 million tons a month for the first seven months of the year, but there is no dominant buyer. Rather there is a broad range of importers that all purchase relatively small volumes.

This means that buyers of U.S. coal could probably find alternative suppliers for the small volumes involved, but U.S. exporters may struggle to find new markets should a majority of its existing buyers impose retaliatory tariffs.

Overall, the picture that emerges is one of significant vulnerability for U.S. energy exporters if we do see another trade war, given how countries could respond to the tariffs currently being proposed by the former president's camp.

Of course, Trump still has to overcome likely Democratic candidate and current vice president, Kamala Harris, in the November election, and then actually follow through on what is likely to be a widely-criticised trade policy.

But the risk remains meaningful. In 2022, Russia's invasion of Ukraine showed us what can happen when a political event roils energy markets.

If Trump is elected and does embark on a trade war, the disruption may not be quite on that scale. But commodity flows - and thus a large part of the global economy - could be impacted if the market has to adapt to an unpredictable political dynamic once again.

Eurozone data has not been giving the ECB an easy time and Tuesday's data is no different. Germany is clearly the problem child here, with an economic contraction in the second quarter whilst CPI and wage growth refuse to give in. Markets are struggling to decide on a direction and instead seem to resort to US data instead. The GDP and inflation readings did little to move the 2Y EUR swap rate, whereas the disappointing US house price index seemed to trigger the dip lower on the day.

EUR investors will be treated to more macro data from the eurozone, with CPI numbers on Wednesday and unemployment on Thursday. But looking at these initial figures, it's clear that the jobs numbers from the US on Friday will likely have more impact. Unless we see a significant downside surprise for eurozone core CPI, rates markets are unlikely to move towards more ECB cuts before Friday.

The Bund-UST 10Y spread widened to 183bp, well above this year's low of 170bp earlier in July. The recent widening was mostly driven by Bund yields moving lower, now having breached the 2.4% handle by some 6bp. German recession risk has added to the broader deterioration in risk sentiment and has helped shift the entire yield curve lower. A weakening of US jobs data on Friday would help tighten the Bund-UST spread again.

US house price data nationally was unchanged for May, weaker than expected. This is not particularly meaningful unless it's the beginning of a series of zeros. City house price inflation 'slows' to 6.8%, and the S&P CoreLogic national measure slowed too. But either way, home prices on that measure are inflating in the area of 6-7% year-on-year. The 10yr and 30yr yield dipped post the number, and the 2yr thought about reacting to it. But the data should not be particularly impactful, and in the end, there is something to support both sides of the directional debate for bonds from them.

The Fed will be pleased with the 0.0% month-on-month on the FHFA house price measure. But house prices still pose a risk to the whole rate-cut narrative. While the talk is that rate cuts will create supply through lower mortgage rates for existing homeowners minded to move, you can also see that that might not be so straightforward. Market yields just want to test lower in any case.

Also, the Conference Board reading for July came in at 100.3, practically bang on the long-run reference level at 100. The only issue is the downward revision for June to 97.8. But still, the July reading has popped higher again, back above 100. This has come from an improvement in expectations, even if they remain well below 100 (78.2). The perception of current circumstances remains (remarkably) positive though, at 133.6, even if down from the prior 141.5. Overall, the consumer sees current conditions as good but future conditions as poor.

Meanwhile, the JOLTS data showed job openings at 8.18 million for July. This is down from upwardly revised June levels, but still relatively elevated (even if down from the remarkable 12 million high seen in 2022). Market rates backed up again on this data. They were on aggregate firmer than expected, and are not giving enough of a panic signal for rate cuts.

The eurozone headline CPI should remain at 2.5% YoY whilst the core CPI reading is expected to come down from 2.9% to 2.8%. The ECB is especially concerned about the sticky services inflation and thus the breakdown will also be watched. From the US, besides the FOMC and refunding announcement, we have MBA mortgage applications, ADP employment and home sales data.

In terms of auctions, we have Germany with €3bn of 6y Bunds.

Yen rose broadly today after the BoJ raised interest rates for the second time this year, and maintained hawkish bias. However, buying momentum has not been decisive. This lack of strong momentum can be attributed to the fact that the rate hike decision was likely well priced in by the markets. Nikkei's rebound following the announce further indicates that BoJ's move was anticipated. Additionally, traders remain cautious ahead of FOMC rate decision later today, where Fed might signal a rate cut in September.

In contrast, Australian Dollar tumbled broadly following release of quarterly CPI data. Markets and economists showed relief as the trimmed mean CPI slowed in Q2, which overshadowed the rise in headline CPI. The continued core disinflation provides RBA with some room to keep interest rates unchanged next week, avoiding the need for another rate hike.

Overall, Dollar is following Aussie as the second weakest currency of the day so far, with Loonie r trailing in third place. Swiss Franc has emerged as the strongest currency, followed by Yen and then Euro. British pound and Kiwi are positioned in the middle of the performance spectrum.

Technically, EUR/AUD's rally from 1.5996 resumed today and hits as high as 1.6685 so far. The bullish view remains intact, and correction from 1.7062 should have completed with three waves down to 1.5996. Further rise is expected as long as 1.6491 support holds. Decisive break of 1.6742 resistance will argue that larger up trend from 1.4281 (2022 low) is ready to resume through 1.7062 high.

In Asia, at the time of writing, Nikkei is up 0.03%. Hong Kong HSI is up 1.90%. China Shanghai SSE is up 1.75%. Singapore Strait Times is up 0.29%. Japan 10-year JGB yield is up 0.0533 at 1.050. Overnight, DOW rose 0.50%. S&P 500 fell -0.50%. NASDAQ fell -1.28%. 10-year yield fell -0.035 to 4.143.

BoJ raised the uncollateralized overnight call rate from 0-0.10% to around 0.25% today. The decision was made by a 7-2 vote, with dissenting votes from Toyoaki Nakamura and Asahi Noguchi, who preferred to gather more information and conduct a careful assessment before adjusting the interest rate.

Regarding JGB purchases, there was a unanimous decision to reduce the amount of monthly outright purchases to about JPY 3T by Q1 2026. The amount will be cut by JPY 400B each calendar quarter.

BoJ stated that economic activity and prices have been "developing generally in line with the Bank's outlook." Moves to raise wages have been spreading, and the annual rate of import price growth has "turned positive again," with upside risks to prices requiring attention.

It also noted if the outlook presented in the July Outlook Report is realized, BoJ will continue to raise the policy interest rate and adjust the degree of monetary accommodation accordingly.

In Q2, Australia's CPI rose by 1.0% qoq, matching both expectations and the pace set in Q1. Annual rate increased from 3.6% to 3.8% , also in line with forecasts.

More notably, the core inflation measure marked its sixth consecutive quarter of cooling. Trimmed mean CPI, which is a key indicator of underlying inflation, rose by 0.8% qoq. This represents a slowdown from the prior quarter's 1.0% qoq increase and falls below the expected 0.9% qoq. Annually, trimmed mean CPI slowed from 4.0% yoy to 3.9% yoy, below the expected 4.0% and continuing its downward trend from the peak of 6.8% in the December 2022 quarter.

Additionally, the monthly CPI for June slowed from 4.0% yoy to 3.8% yoy, again matching expectations.

In July, New Zealand's ANZ Business Confidence saw a notable increase, jumping from 6.1 to 27.1. Own Activity Outlook also improved, rising from 12.2 to 16.3. Meanwhile, cost expectations fell slightly from 69.2 to 68.2, and wage expectations edged up from 73.5 to 74.6. Pricing intentions saw an increase from 35.3 to 37.6. Importantly, inflation expectations continued their steady decline, falling from 3.46% to 3.20%.

ANZ commented that the economic climate remains one where "bad news is good news" for RBNZ. With mounting evidence that monetary policy has been effective, perhaps overly so, there is now a broad expectation that RBNZ will start easing the Official Cash Rate this year.

ANZ noted that "evidence is mounting that the inflation dragon is on its last legs," which positions the New Zealand economy for a more robust recovery compared to a scenario where inflation control efforts were only partially successful.

China's official NBS PMI Manufacturing index fell slightly from 49.5 to 49.4 in July, just above the expected 49.3. This index has remained below the 50-mark, which separates growth from contraction, for all but three months since April 2023.

NBS analyst Zhao Qinghe attributed the decline in manufacturing activity to the typical off-season for production in July, insufficient market demand, and extreme weather conditions such as high temperatures and floods in some areas.

PMI Non-Manufacturing index also fell, dropping from 50.5 to 50.2, in line with expectations, but still indicating expansion for the 19th consecutive month. Within this category, construction subindex decreased from 52.3 to 51.2, while services subindex slipped from 50.2 to 50e.

Overall, the official PMI Composite, which combines both manufacturing and non-manufacturing sectors, declined from 50.5 to 50.2.

Eurozone CPI flash is the main focus in European sesion today while German import prices and eunemployment, as well as Swiss UB economic expectations will be released.

Later in the day, Canada GDP would be a focus while US will release ADP employment, Chicago PMI and pending sales. But the main event is definitely FOMC rate decision.

Intraday bias in GBP/JPY is back on the downside with breach of 195.84 temporary low. Fall from 208.09 is probably a larger scale correction and should target 185.49 fibonacci level. Nevertheless, on the upside, firm break of 199.45 resistance will mix up the outlook and turn intraday bias neutral first.

In the bigger picture, considering bearish divergence condition in W MACD, 208.09 might be a medium term top and fall from there could already be correcting whole up trend from 148.93 (2022 low). Risk will now stay on the downside as long as 55 D EMA (now at 200.51) holds. Deeper fall would be seen to 38.2% retracement of 148.93 to 208.09 at 185.49.